Question

Q3) "Measurement is the process of determining the monetary amounts at which the elements of the financial statements are to be recognized." a. Identify and explain the four possible measurement bases? (4 marks) b. XL Co. owns a machine purchased a machine 4 years ago for OMR 80,000. The accumulated depreciation on the machine to date is OMR 32,000. Depreciation rate is 10% per annum straight line method. XL Co. can sell the machine to another manufacturer for OMR 50,000. In order to make the sale, XL Co. must incur a transportation cost of OMR 2000. If XL Co. replaces the machine with a new version, it would cost OMR120,000.

Answer 1

A. Usually, 4 bases of measurements used are:

1. Historical cost: The value of the asset is recorded at its original cost when acquired by the company.

2. Current cost: Current cost represent the exchange price that would be required today to obtain the same asset. Current cost is also used to value the asset.

3.Realizable value method: It is the value for which assets can be sold, minus estimated costs of selling the asset.

4. Present value method: In this method present value of future cash flows and used to value the asset

B.

Asset valuation using Historical cost method

Value of the asset= Acquisition cost- Accumulated depreciation

= 80000-32000= 48000

Asset valuation using Current cost method

Value of the asset = Current market value of the asset- Accumulated depreciation

= 120000- 32000= 88000

Asset valuation using realizable value method

Value of the asset = Realizable value- cost of sale

= 50000-2000= 48000

Asset valuation using Present value method

Value of asset = present value of future cash flows

PV of 1st-year cash inflow= 25000 x .909= 22725

PV of 2nd year cash inflow = 25000 x .826= 20650

PV of 3-6 years cash inflows= 2.619 x 20000= 52380

value of the asset = 52380+20650+22725= 95755